March 28 (Bloomberg) -- A 1.5 percent decrease in plantings of sugar beets in 2013 may increase pressure on the government to buy the commodity, as the acreage drop won’t reduce excess supplies enough.
Farmers intend to plant 1.211 million acres of the crop this year, down from 1.23 million last year, according to a U.S. Department of Agriculture survey of producers released today.
The drop in plantings of beets bought by American Crystal Sugar Co. and sold to processors including Mondelez International Inc. won’t ease pressure on the government to implement a program to buy surplus sweetener for ethanol plants, said Michael McDougall, a senior vice president at Newedge Group in New York.
“The domestic sugar market will remain oversupplied, and the USDA is more likely to sell sugar at a loss,” McDougall said in a telephone interview today.
Beets are responsible for almost three-fifths of the U.S. sugar crop. Futures prices for sugar have dropped 39 percent in the 12 months ending yesterday as stockpiles have risen to their biggest in a decade, potentially triggering federal purchases under programs designed to rein in surplus.
The USDA on March 13 said it’s considering “several options” to support prices, including purchasing excess sweetener, possibly for sale to ethanol plants, or restricting imports to the minimum required by international treaty. The agency did not immediately respond to phone calls and e-mails seeking comment on today’s report.
“Taxpayers could potentially be forced to pay millions, all because of America’s outdated sugar policy,” said Jennifer Cummings, a spokeswoman for the Coalition for Sugar Reform, in an e-mail. The coalition is a Washington-based group that includes the U.S. Chamber of Commerce, the American Bakers Association, the National Association of Manufacturers and the environmental group the Everglades Trust.
Producers say they need the sugar program to keep pace with cheaper imports, while trade groups representing food and beverage companies including PepsiCo Inc., Mars Inc. and J.M. Smucker Co. say price supports increase consumer costs and hinder job creation.
The government next week can begin adjusting import levels, one way to restrict supplies, under legislation passed in 2008. Sugar-subsidy spending in a time of record farm profits has critics in Congress calling for a reduction in aid.
The department would need to buy 534,000 short tons, 5.8 percent of this year’s estimated production, to reduce the surplus to the government’s desired level, according to Frank Jenkins, president of Jenkins Sugar Group in Wilton, Connecticut, the largest broker of U.S. sugar.
While that may boost prices, Jenkins said it doesn’t mean processors won’t default on loans taken out under a government price-support program, leaving taxpayers responsible. About $820 million in loans had been taken out as of today, according to USDA data.
Borrowers are guaranteed a minimum of 20.9 cents a pound for unrefined sugar. If it drops below that level, processors who get the credits can repay their debt by selling the sugar to the USDA by the end of the market year, which coincides with the fiscal year ending Sept. 30.
Domestic raw-sugar traded in New York slumped 0.6 percent to 21.13 cents a pound today at 3:19 p.m. amid the biggest glut since 2000. Production this year, expected to be the most since 1981, has helped boost estimated stockpiles to 20 percent of annual consumption, the highest ratio in 12 years, according to the USDA.
Processors pledged 1.95 million short tons as collateral, equal to about 21 percent of the crop. The most ever acquired by the government through the program was 764,000 tons in the year ended Sept. 30, 2001.
Based on this year’s low for domestic sugar futures, reached on Feb. 21, taxpayers would be responsible for almost $22 million, according to Bloomberg calculations. The price is now above the government support level.
To avoid forfeitures, the government can prop up prices by buying sugar in a program created in the 2008 farm bill. Under what’s called feedstock flexibility, the sweetener purchases are then sold to ethanol plants.
Corn is the dominant source of ethanol in the U.S. To make sugar competitive with the grain among ethanol processors including Archer-Daniels-Midland Co., the government may need to sell the product at a loss, potentially leaving taxpayers on the hook for millions more.
Without government purchases, domestic sugar prices will trade about 1.5 cents to 2 cents above world prices by mid-year, Jenkins said. At current levels, that would be low enough to trigger federal payouts.
New Hampshire Democratic Senator Jeanne Shaheen last month introduced a bill that would mostly return to the sweetener policy in place before the current farm bill was enacted in 2008. Possible government aid is “a clear signal that we need to reform our sugar program,” Shaheen said in an e-mail. Pennsylvania Republican Joe Pitts introduced companion legislation in the House.
The Sugar Alliance, which represents growers and processors including American Sugar Refining Inc., maker of Domino Sugar, said attacks on the sugar program are misguided. The group attributes the price drop in the past year to imports from countries that subsidize sweeteners.
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